Transcription
Hello. So, we start Unit 5, and in this video, we are going to look at the demand side of the market. So, Unit 5 is about the market, but specifically, we want to build the market structure from here. And here, we'll look at the demand. And your host, Elias, let me quickly take you through the outline.
So, the first thing we'll look at is the law of demand. And that, before going to the law of demand, we would define demand and try to describe its structure. And then later on, we'll distinguish between a demand schedule and a demand curve. So, what we will have to make serious distinctions here between what a schedule is and what we consider a curve in this course. And then we'll conclude by looking at the determinants of demand and the quantity demanded. And at this point, we are going to distinguish between demand and quantity demanded. For further readings, you can look at Mankiw, Chapter 4, and McConnell, Chapter 3.
Okay, so let's start by defining demand. So, demand is the amount of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. Now, you will notice that when we are defining demand, number one, we are looking at a series of prices. So, we have a series of possible prices, and we are also looking at a specified period of time, not just at a point in time. Meaning, for us to consider demand, we need to have a series at different or various amounts of prices and then over a specified period of time. If price was to increase tomorrow, how will the consumer behave in terms of purchases of the given product? Is the consumer going to buy more or less? Basically, we know that for demand, for a basic demand function or demand curve, we will note that there will be an inverse relationship because the higher the price, the lower the quantity demanded.
So, the other thing we look at is the willingness and ability, which is part of the demand definition. Okay, so this means that demand shows the amount of the product that will be purchased at various possible prices, holding other factors constant. Therefore, we should note two things, two main things that stand out from the definition of demand. Number one is that we are seeing the willingness of consumers to purchase the commodities at various possible prices. So, the consumer must be willing to obtain the items. Not only should the consumer be willing, but the consumer should or must also be able to buy those commodities. This means that for demand to be defined, an individual consumer, group of consumers, must be willing and able. If the consumer is willing but has no capacity to pay for the items, or is not able to pay for the items, then we will not be able to define his or her demand. In the same way, if the consumer is able to pay for the items but he or she is not willing to get them, we will not be able to define his or her demand. In short, for one's demand to be defined, there must be willingness and ability.
Okay, so let's now look at the law of demand, which says that other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely, a decrease in price will cause an increase in the quantity of it demanded. This implies that there is an inverse relationship between the price of a given commodity and its quantity demanded.
Okay, so we make an assumption of "other things equal" here, or ceteris paribus, because demand for a product is not only affected by its own price, by the price of that item. It is affected by many other factors that we need to consider in the consideration of what demand is. But all we've done is we've simplified the model. When we draw a graph, we are wanting all other factors, or keeping the influence of other variables constant, and then observe the behavior of quantity demanded when price changes.
Okay, so we will then focus on the determinants of demand after we look at the distinction between the demand schedule and the demand curve.
Okay, let's look at the demand schedule and the demand curve. So, with the demand schedule, a schedule is simply a table. And therefore, a demand schedule is a table showing the total quantities of a good or service that buyers wish to buy at each price. And the demand curve is a graph showing the total quantity, or total quantities, of a good or service that buyers wish to buy at each price. Now, when we say "at each price," it means that we have a series of prices, and then we want to consider only a given price. So, as we move down the curve, we will be seeing the different amounts of a commodity, just as prices will be changing. In a visual form, a demand schedule looks like this, where we have prices ranging from 0 to 8 as an example, and the quantity demanded of it reducing from 8,000 down to 0. So, when the price is 0, the consumer would want to get 8,000 units. And for the increase in price to 2, the consumer reduces the quantities purchased to 6,000. And an increase in price further to 4 leaves the consumer to reducing the quantity demanded to 4,000. And if the prices continue to rise, the prices continue to rise, the quantity demanded will continue to fall.
Let's plot this data now, which we have in the schedule, on the demand curve, with price on the vertical axis, measured in the net kwacha, and the quantity demanded measured in thousands on the horizontal axis. We can have the price figures and the quantity demanded figures. Now, we note that when price is 0, quantity demanded is 8,000. Price is 2, quantity demanded will be 6,000, all the way to when price is 8, quantity demanded becomes 0. And this, if we plot them, then our data points will look like that. Joining these points together gives us the demand curve. Hence, the demand curve for a product shows that there is an inverse relationship between the price of a commodity and the quantity demanded of it. The higher the price, the lower the quantity demanded, as postulated by the law of demand.
Let's now look at the determinants of demand and the quantity demanded. The first determinant we look at is the own price. Then we also have income, we have the price of related goods, we have the tastes of the consumer, the consumer expectations, the number of buyers. Now, you should note that these are not the only determinants of demand.
Okay, so let's look at the own price. Now, the own price of a commodity affects the quantity demanded because when we hold other factors constant, then the change in own price will only affect the quantity demanded of it and not the entire demand for a consumer. So, we see that from our previous table or graph, we see that when price is at 8, quantity demanded would be 0. When price changes to 6, quantity demanded increases to 2,000. For a further reduction in price, what we demanded increases. Therefore, the change in price will cause a movement along the demand curve.
The other determinant is the income. Now, the effect of income on the demand of a product differs depending on the nature of the product. Now, in basic, maybe thinking, you might think that when income increases, your demand will increase. Well, there are other commodities whereby income increases, and you end up reducing the demand for that product. As such, when looking at the effect of income on the demand for a product, we distinguish between normal goods and inferior goods.
Let's start by looking at normal goods and see the effect. Suppose that you consider meat to be a normal good, and that there is an increase in your income. As a result of that, with the price on the vertical axis and quantity demanded on the horizontal axis, we note that with our individual demand, an increase in income for a normal good will cause the demand for meat to increase. And when your demand increases, it means that you will be able to buy more units because your purchasing power has increased. And as such, the demand curve will shift out to the right. So, for normal goods, an increase in income leads to an increase in demand, and therefore the demand curve, that is, the entire demand curve, will shift out and to the right. If there is a reduction in your income, if there is a reduction in your income, it means your demand for meat, which we've assumed to be our classic here, will reduce. And the reduction in your demand, we mean that the demand curve will shift down and to the left. Therefore, an increase in income for a normal good increases the demand, and a decrease in income for a normal good reduces the demand.
Let's look at the effect of inferior goods. Now, for inferior goods, these are goods whose demand reduces when your income increases. Now, I will use a kapenta here because if you consider kapenta to be an inferior good and meat to be a normal good, it means that when you have more money, you will buy more meat than kapenta. In other words, you will reduce your consumption of kapenta in favor of meat. This means that for a reduction in your income, you have more incentives to buy an inferior good, which is kapenta. So, consider price on the vertical axis and demand on the horizontal axis, and that we are facing a reduction in the income of the consumer. And with a classic example of kapenta here, it means that your demand for kapenta will increase because you will not be able to afford meat, or if you wanted to buy meat, you will not buy as many quantities as you would if your income was not affected. Therefore, your increase in income, meaning reduction in income, has caused you to shift your purchases and increase the purchases of kapenta, which is an inferior good. Therefore, the demand for the inferior good will increase when income reduces, and the demand shifts out and to the right. If there is an increase in your income, meaning many of you have experienced an increase in your income, it means this time around you will want to switch your purchases to a more preferred commodity or to a normal good, which is the same meat in our case. If you prefer meat, it means you will reduce your purchases of kapenta. That means that when your income is high, you will demand less of the inferior good, and therefore the demand curve will shift down and to the left.
The other determinant that we can look at is the price of related goods. Now, when looking at the effect of the price of related goods, we distinguish between substitute goods, for example, Mirinda and Fanta, as well as complement goods, where we can take the case of bread and butter.
Now, let's first start by looking at substitute goods, Mirinda and Fanta. Suppose that the price of Fanta has gone up. It means that the quantity demanded for Fanta, holding other factors constant and following the law of demand, the quantity demanded for Fanta will reduce because the higher the price, the lower the quantity demanded. So, if the price of Fanta goes up, as a consumer, you will reduce your quantity demanded for Fanta, which means that if the price of Mirinda is constant, and because Mirinda is a substitute good, you will buy more of Mirinda. This means that the demand for Mirinda will increase as a result of the increase in the price of Fanta. In other words, there is a direct relationship between the quantity demanded of a given good and the price of its substitute good. Graphically, with price on the vertical axis and quantity demanded on the horizontal axis, and our initial demand curve D1, an increase in the price of Fanta will increase the demand for Mirinda, and therefore the demand curve for Mirinda will shift out and to the right. Conversely, a decrease in the price of Fanta will cause the quantity demanded of Fanta to increase, and as a result, we will notice that people will start shifting away from Mirinda to buying more of Fanta. So, this means that the reduction in the price of Fanta has caused a decrease in the demand for Mirinda, and with our initial demand curve D1, then a decrease in the demand for Mirinda will be displayed by a shift in the demand curve down and to the left.
The other determinant that we look at is the taste. So, a favorable change in consumers' taste or preferences for a product means that more of it will be demanded at each price. This is because this means that a change which is favorable to the consumer will cause the demand to increase, and a change which is less favorable will cause the demand to reduce. So, consider, say, maybe the invention of the introduction of new phones, for example, and the consumer develops a high taste for such a product. It means that with the price on the vertical axis and quantity demanded on the horizontal axis, and our initial demand curve D1, the increase in taste for a product will cause the consumer to demand more of it, and therefore the demand curve will shift out and to the right to D2. If the consumer, on the other hand, loses interest in a given commodity, maybe because it has gone out of fashion, it means that then the demand for the consumer will shift down and to the left because the demand for it will reduce, and the consumer will shift interest to other commodities.
We also have expectations as the determinants of demand. Now, with expectations, your expectations about the future may affect your demand for a good or service today. Suppose you expect that the price of, say, Fanta, maybe they say the price of Mirinda will increase tomorrow. You are likely to buy more today to avoid the high price which will be approached more. Therefore, because the price of the commodity will increase tomorrow, your behavior is to demand more today, and therefore the demand curve will increase, which means that your demand curve will shift to the right because your demand has increased. So, graphically, with our initial demand curve D1, because you expect the price of Mirinda to be high tomorrow, today your demand for Mirinda will be high, and therefore the demand curve will shift out and to the right. And if you expect the price of Mirinda to reduce tomorrow, it means that your demand today will reduce because you want to buy a commodity at a cheaper price tomorrow, and therefore the demand curve will shift down and to the left today.
Now, I like looking at this classic case where you have to be what go and buy commodities which would be on promotion come tomorrow. Think about the situation that you go through. Suppose Shoprite announced that we are going to reduce the prices of a given commodity on Black Friday. People today, their behavior will be that they will reduce their purchases or the demand for those items, and then on Black Friday, they will buy more of it. And I'm sure you have witnessed the stampede that you will be at the Shoprite entrance. Those, this is because consumers are rational, and therefore they want to get the best out of whatever resources they have.
Lastly, let's look at the last determinant, which is the number of buyers. So, the number of buyers. If we have an increase in the new babies, for example, of say, new babies of Unipol babies, it means that the demand for diapers, baby lotion, and under-five tonic services will increase. And therefore, it means that because we are in new babies, the buyers, who are the mothers, will be more. And therefore, because the number of buyers has increased, the demand for the product will also increase. Graphically, with our initial demand curve D1, if we have an increase in the number of buyers, the demand for a product increases, and therefore the demand curve shifts out and to the right. And for a decrease in the number of buyers, with our demand curve D1, the demand curve will shift down and to the left.
Okay, so that is it about the determinants of demand. Let's now look at the demand function. Now, we note that demand for a product is a function of its own price, the price of related goods, the income of consumers, the taste, the population, the expectation, and other factors, including the own price. So, now, when we want to plot the demand curve, we will have the own price as the only determinant of demand. Now, when we bring this on a function to include all these, it means that then quantity demanded will be a function of these factors that were denoted here. Now, this shows that when we are plotting the demand curve, then we hold all these other factors constant. We keep them constant and only focus on the effect of price on the quantity demanded. And that means that then our quantity demanded becomes the function of price. So, the demand curve is drawn by holding all other factors constant and only focusing on the effect of price.
Okay, so let's now look at the market demand. So, the market is made up of several consumers, and these consumers have different preferences, have different income levels, have different tastes, and so on. Therefore, it means that if we assume only two households, that is, Household A and Household B, and that we want to see the effect of their behavior on the market, let's assume that individual A demands three units when the price is four and four units when the price is three. And the consumer, Household B, demands four units when the price is four and six units when the price is three. Then the market demand will be the horizontal summation of these individual household demands. That means, in the market, at the price of four, for the market, the quantity demanded will be seven, which will be 3 plus 4. And when the price reduces to three, the market demand increases to 10, which is 4 for Household A and 6 for Household B. Therefore, the market demand is simply the horizontal summation of individual demands.
Okay, so thank you very much for watching. If you have questions, please send an email to Elias at gmail.com. I will see you in the next session where we will look at the supply side of the market. Bye-bye.