DEMAND ANALYSIS: ISSUES ARISING Individual and Market Demand Demand id defined as the amount of a good that people

will actually be willing to buy at a given price in a given time. Willingness implies having the ability to purchase (purchasing power, backed by the desire for the good. Demand is often misconstrued to be want or need but the distinction is clear. Want refers to just the desire for something, which is not necessarily essential or urgent for the purchaser and can therefore be done away with. Need refers to an essential commodity that is urgently required and which one cannot do away with. Eg. Food, clothing, and shelter. Therefore, willingness, need or want backed by the ability to purchase is referred to as effective demand in economics. In other words, people can have willingness, need or want for a commodity by this remains a wish which is termed as latent demand, if it is not backed by the ability to purchase. Quantity Demanded The total quantity of a good that people are willing to purchase at different prices over a period of time. The quantity demanded refers to the desired quantity, which people are wiling to purchase, given that all which people are willing to purchase, given that all other factors which influence demand remain unchanged. The Law of Demand all other things being equal, the lower the price at which a commodity is offered the greater the quantity of it that is demanded; the higher the price the smaller the quantity that consumers would be willing to buy. Demand Schedule Demand is not a particular quantity but a schedule of the amounts of goods that buyers would want to buy at different prices. For every good there exists a definite relationship between price and the quantity of the good that is demanded. The price-quantity relationship is referred to as the demand schedule. Therefore, it can be defined as a table that shows the quantities of a product that a consumer is willing to purchase at various prices during a specified period of time. (NB: economists use the term schedule because the table, with its parallel columns of numbers, resembles a train schedule). The table below is an example of a demand schedule.

A hypothetical Demand Schedule for Yam by an Individual. Price (kg/GHC) 12 10 8 6 4 2 Quantity of Yam Demanded (in kgs) 2 4 5 7 8 10

It can be noted from the table that, the quantity demanded increases as the price of the yam decreases and vice versa.

Market Demand Schedule Demand schedules may be drawn up to reflect the behavioural propensities of a single unique individual, household or firm as the table above. It can also be drawn as a composite or aggregate market demand schedule for the particular good. Such a composite market demand schedule may be derived by adding up all the demand schedules of a large number of individuals, households or firms that active or potentially active as purchasers in the market under consideration. Assuming there are two individuals in our hypothetical market, we can derive the composite or aggregate market demand schedule, just by adding the quantities demanded of the products by the product by each individual. The table below illustrates the phenomenon. Price of ice-cream cone (GHC) 0.20 0.50 1.00 1.50 2.00 2.50 3.00 Quantity Demanded by Individual A 12 + 10 8 6 4 2 0 Quantity Demanded by Individual B 7 = 6 5 4 3 2 1 Total Market Demanded by 2 individuals 9 16 13 10 7 4 1

Demand Curve The demand curve is a graphical representation of the demand schedule. It illustrates the graphical relationship between the quantity demanded and the price of a product at a particular time. From the table above, the individual demand curves for A and B as well as the market demand curve are shown below:

3.5 3 2.5 2 1.5 1 0.5 0 0 2 4 6 8 10 12

3.5

Individual A

3 2.5 2 1.5 1 0.5 0 1 2

Individual B

3.5 3 2.5 2 1.5 1 0.5 0 1 4 7 10 13 16 19

Total Market

Characteristics of Normal Demand Curve The demand curve has the following properties: 1. The demand curve slopes downwards to the right. That is negatively sloped and means an inverse relationship between price and quantity demanded (ie. due to the law of diminishing marginal utility). 2. The demand is a flow concept in the sense that quantities demanded vary with the length of time involved. That is, if 5 crates of apples are demanded per week, then 20 crates are demanded per month etc.

3. The demand curve can be linear or non-linear depending on the underlying mathematical function. Linear means a constant slope throughout the curve. 4. Any single demand curve assumes that every other influence except the commoditys own price is held constant. That is to say that price remains the only determinant of demand for any particular curve. 5. The demand curves are almost always characterized by price on the vertical axis and quantity demanded on the horizontal axis.

Consumers Surplus Consumers surplus refers to the difference between what the consumer would be willing to pay to purchase a given number of units of a commodity and what he/she actually pays for all unit of the commodity, the price he is just willing to pay for the last unit purchased, even though the MU on earlier units is greater. Consumers surplus can be measured by the area under the consumers demand curve and above the commodity price. It should also be noted that, consumer surplus arises from the different prices consumers would be willing to pay for different quantities of the same good. Imagine how much you would be wiling to pay for your first bottle of fizzy drink, as opposed to your fifth bottle. Illustration Price G

Consumers Surplus B Total Expenditure DD A F qty C

In the figure above, the consumer, purchases AF units of the commodity at price AB and spends AB times AF (the area of the rectangle ABCF) on this commodity. However, this consumer would have been willing to pay a higher price for all but the last unit of this commodity purchased (as indicated by the

height of her demand curve) because these previous units give her a greater marginal utility than the last unit purchased. The difference between what he/she would be willing to pay for AF units of the commodity (the area of AGCF) and what she actually pays for them (the area of ABCF) is an estimate of this consumers surplus (the area of triangle BGC). Demand Function Another way of expressing the price-quantity relationship in economics is by the demand function. Mathematically, it can be shown that quantity demanded of a good is a function of price and other factors that also determine demand. This can be shown below: qd = f(price, other factors) or qd = f(p, u, v, w, x, y, z) where: refers to the quantity demanded of a particular good f refers to function p refers to price u, v, w, x, y, z denote the other factors. For simplicity, the quantity demanded is analysed only in relationship with price with all other determinants of demand being held constant. This form of analysis, which limits economic relationships to only one dependent and one independent variable, whilst holding all other determining independent variables constant is referred to in economics as ceteris paribus. In mathematics the general symbol for the determinants, which is supposed to remain constant, is characterized by a dash on top of the determining factors. qd = f(price, other factors) or qd = f(p, u, v, w, x, y, z) or qd = f(p) The above expression is a functional equation which depicts the relationship between quantity demanded and price. Normal or superior goods price-quantity relationship has a continuous declining demand curve. For abnormal case, the quantity demanded rises when the price also rises. Eg. Inferior goods and Giffen goods. Determinants of Demand Quantity demanded of a product is influenced by several factors. These determinants are as follows: 1. 2. 3. 4. Own price Level of income Taste, religion, fashion and preference Price expectations

5. 6. 7. 8.

Population Government policy Weather conditions and seasons Inventions and innovations

Own Price An increase in the price of a good normally leads to a decrease in the quantity demanded of the good and vice versa. This inverse relationship between quantity demanded of a product and price is characterized by the law of demand. Level of Income The higher the income of the consumer, the greater the amount of any good that he can buy at any given price. When incomes increase, the demand for most goods will increase though there are few exceptions. An increase in income is associated with an increase in demand. If both income and price increase simultaneously, their separate effects on quantity demanded cannot be easily determined so in analysis both factors should not be allowed to vary at the same time. Thus, whereas the increase in income will tend to increase the quantity demanded, the increase in price will, on the other hand, tend to decrease the quantity demanded. The net effect depends upon whether the income or the price effect is the stronger. Price of Related Goods Goods may be related wither as substitutes or complements. Substitutes Goods such as mutton and beef as well as tea and coffee are in pair and characterized in such a way that if the price of one should rise relative to their other, consumers will easily switch their demand to the other and vice versa. So, two goods are substitutes if the price of one falls (rises) relative to their other, consumers buy more (less) of it and less (more) of the other. Complements Two goods are complements if the price of one and the demand the other are inversely related, that is, when the fall (rise) in the price of one raises (lowers) the demand for the other. Examples include petrol and cars, shoe and shoelaces etc. A fall in the price of cars will certainly raise the demand for petrol. Complementary goods are jointly demanded.

Taste, Fashion and Preference Taste, fashion and preference for a particular commodity connote great delight for enjoying that commodity. They influence demand as they increase demand for the particular commodity. Eg. Taste and preference for rice by Ghanaians recently has shot up demand enormously. Fashion, religion and culture or custom influence tastes and preferences and thus demand for particular commodities. Eg. In Ghana, the widespread celebration of funeral rites and the use of non-white multicoloured cotton fabrics for such celebrations, as custom demands, have given rise to a high demand for multi-coloured fabrics other nylon or polyester fabrics. Taste, fashion and preferences change over time and so do the demand for them. Once a while, we have certain items becoming highly demanded because it has become the current fashion. Demand for such things rise, on occasions, even when prices are also rising, making demand curve abnormal. Example, wigs for instance had a high demand in the sixties and women to wear wigs. This days, this has been replaced by other hair styles like rasta, weaveon thereby leaving demand for wigs to fall. Expectation of Changes in Demand and Price Conditions The expectations refer to fears of imminent change in conditions, which influence the quantity demanded of a commodity. If people expect the price of a commodity to rise, they would try to demand more to stockpile. On the other hand, if people expect prices to fall because of an expected bumper harvest, they tend to reduce demand. If people expect war or catastrophe, they tend to demand more of basic needs such as food for fear of an imminent shortage in supply. Population The size of a population of a country and its age and sex distribution can affect the demand for products. A country with large population like China, has a higher demand for commodities than a country with small population as compare to China, like Ghana. Government Policy Government policy can affect demand as it can, for certain reasons, ban the use of the product outright, restrict or expand its consumption. The policy can take the form of a tax imposition, a subsidy or any other directive. Normally, taxes, in the form of consumption taxes or custom duties, imposed on the price of goods tend to decrease demand for the good, all other things being equal. Also, the government may decide to impose tax on personal disposable incomes to reduce available incomes for the purchase of goods. Subsidies, on the other hand, tend to increase the purchasing power or reduce the price of certain products and so increase their demand. Weather Conditions and Seasons Demand for certain products tend to be high or low during certain periods of the year due largely to weather conditions or the seasons. For instance, the demand for umbrellas tends to be high during the rainy or wet seasons. Also at the beginning of every farming season, demand for cutlasses goes up.

Inventions and Innovations Inventions bring about new products, whilst innovations improve upon existing ones. They affect demand as advances in technology lead to replacement of existing products with new substitutes. In this case, the demand for the new product will rise whilst that of the old one declines. The extension of electricity in most towns in Ghana, for instance, has led to the decline in demand for kerosene lanterns but an increase in the demand for electric bulbs. Also, demand for typewriters has gone down as opposed to demand for computer. Changes in Quantity Demanded A change in the quantity demanded occurs when the price of the good changes. This results in a movement along a given demand curve, that is, a movement from one price-quantity position to another price-quantity position on the same demand curve.

P2

P1 Q2 Changes in Demand

An increase in price from P1 to P2, caused a fall in the quantity demanded from Q1 to Q2. That is, a movement from point a to point b on the demand curve.

Q1

Change in demand occurs when there is a change in the other determinants of demand apart from the own price of the commodity. These changes cause the demand curve to shift either to the left or to the right of the original demand curve. A shift to the left of the original demand curve indicates a decrease in demand, whilst a shift to the right of the original demand curve suggests an increase in demand. Price Increase in Demand Price Decrease in Demand

P D2 D1 Q1 Q2 Qty

P D1 D2 Q2 Q1 Qty

Causes of Shift or Change in Demand Causes of Increase in Demand or Rightward Shift of Demand Curve 1. Increase in the price of close substitutes 2. Decrease in the price of close complementary goods 3. Increase in the size of potential buyers (population) 4. Increase in expectations concerning social unrest, catastrophe, political instability, income and price of the product, supply shortages etc. 5. Reduction in taxes and increase in subsidies, government demand (hire purchase etc.) restriction etc. 6. Increase or positive change in taste and preferences. 7. Increase in income for normal goods. 8. Decrease in income for inferior goods. Engels Curve Causes of Decrease in Demand or Leftward Shift of Demand Curve Decrease in the price of close substitutes Increase in the price of close complementary goods Decrease in the size of potential buyers (population) Decrease in expectations concerning social unrest, catastrophe, political instability, income and price of the product, supply shortages etc. Increase in taxes and decrease in subsidies, government demand (hire purchase etc.) restriction etc. Decrease or positive change in taste and preferences. Decrease in income for normal goods. Increase in income for inferior goods.

Another way of examining the relationship between income and consumption is to analyse consumer spending in terms of shares of the various goods in the consumers budget. Expenditure share is the fraction of total consumer expenditure spent on a given commodity. Budget share of good x = price x quantity of x Total spending The curve showing the relationship between income at various levels and consumption expenditure on commodities is called the Engel curve so named after Ernst Engel who first made a study of these relationships from expenditure surveys of families of Belgium workers in the 18th century. Engel proposed the law: the larger the familys income, the smaller the fraction of income spent on food. A % of income spent on commodity

income

Curve A characterizes the expenditure on demand curve for normal or luxurious goods, thus expenditure increases with increases in income levels. Curve B also characterizes expenditure or demand curve for necessities, whose demand or expenditure remains constant with increases in income. Curve C, on the other hand, characterizes inferior goods whose demand or expenditure declines when income levels increase. The law says that, given that tastes and preferences do not change, people tend to spend less on less nutritious food, particularly those regarded as inferior goods, but more of superior and luxurious goods as their income increases. Research has shown that as per capita income of people increases, the proportion of income spent on food decreases but that on transport, accommodation, and education and training increases.