15 min read
Mathew Wahome
Topic 6: Demand
1. Meaning
Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.
Effective demand: the desire to buy backed by purchasing power.
2. Law of Demand
Other factors remaining constant, the quantity demanded of a good falls as its price rises, and rises as its price falls.
Demand Schedule (Example)
| Price (KSh) | Quantity demanded |
|---|---|
| 10 | 90 |
| 20 | 70 |
| 30 | 50 |
| 40 | 30 |
| 50 | 10 |
The demand curve slopes downward from left to right.
Why the Curve Slopes Downward
- Income effect: lower prices increase real income.
- Substitution effect: cheaper goods replace costlier ones.
- Law of diminishing marginal utility.
- New buyers enter the market at lower prices.
3. Determinants of Demand (Shift Factors)
- Price of related goods: substitutes (tea/coffee) and complements (car/petrol).
- Income: higher income increases demand for normal goods.
- Tastes and fashion.
- Population size and structure.
- Expectations of future prices or income.
- Advertising and promotion.
- Weather and seasons.
4. Movement vs Shift of the Demand Curve
| Movement along the curve | Shift of the curve |
|---|---|
| Caused by a change in the price of the good | Caused by non-price factors |
| Called a change in quantity demanded | Called a change in demand |
- Increase in demand: shifts right. Decrease in demand: shifts left.
5. Exceptions to the Law of Demand
- Giffen goods: inferior staples where demand rises with price.
- Prestige (Veblen) goods: luxury items bought because they are costly.
- Necessities (e.g. salt): price changes have little effect.
- Expectation of further price rise.
- Ignorance about price or quality.
6. Types of Demand
- Individual and market demand
- Joint (complementary) demand
- Competitive demand
- Derived demand
- Composite demand