Lesson objective

At the end of this lesson, you will be able to:

• Define the concept of demand
• Analyse the law of demand

Brainstorming Question

Why did individuals respond differently to an increase in price? Do you think that there are commodities, which we continue consuming the same amount even if their price is increasing?

Key Terms and Concepts

Demand

The terms demand, desire, and want are frequently used synonymously to express what an individual needs and would like to acquire. Demand states that the consumer must be willing and able to buy a commodity which they desire at a given price during a given period of time.

Accordingly, demand is distinct from a mere desire to acquire something. Human wants are unlimited, and desires are numerous. However, only a desire backed up by the ability to pay the price for the commodity and the willingness to purchase it is called demand. We can say demand refers to an effective desire. A desire becomes an effective demand only when it is backed by the following three features:

• Ability to pay for the good desired,
• Willingness to pay the price of the good desired, and
• Availability of the good itself.

Furthermore, the demand for a good is constantly stated relative to a specific price and certain time. For instance, an individual may be interested in buying certain jeans at a price of Birr 500, but they would not absolutely demand it if its price is Birr 900. Likewise, an individual may be willing to buy a room heater at a price of Birr 1000 during a cold season, but they may not be interested in buying it at this price during a hot season.

Based on the aforementioned considerations, we can define demand as follows: Demand for a commodity is the amount of it that a consumer is willing to buy at various given prices and a given moment of time.

Quantity Demanded

Quantity demanded is the amount of a commodity a consumer must be willing and able to buy, which they desire at a given price during a given period of time.

Law of Demand

The law of demand states that, ceteris paribus, the price of a commodity and its quantity demanded are inversely related. Ceteris paribus means other things remain the same. In other words, the higher the price, the lower the quantity demanded. The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good.

Demand Schedule

A demand schedule is a tabular description that presents various quantities of a commodity that would be demanded at different prices. It refers to a tabular representation of the relationship between price and quantity demanded. It demonstrates the quantity of a product demanded by an individual or a group of individuals at specified prices and times.

Price (Birr Per kg)	Quantity Demanded/week
5	5
4	7
3	9
2	11
1	13

The above demand schedule shows the different quantities of oranges demanded by an individual household at different prices. At Birr 5 per kg, the consumer demands 5kg of oranges. However, an individual household’s demand for 13 kg of oranges at Birr 1 per kg.
Demand Curve
A demand curve is a graphical representation of the relationship between different quantities of a commodity demanded by an individual at different prices.

Figure 4.1: Individual household demand curve

Demand Function

It is a mathematical representation of the relationship between price and quantity demanded, ceteris paribus. A typical demand function is given by:

$$Q_d = f(P)$$

where, Qd is the quantity demanded and P is the commodity’s price,

Market demand

Market demand describes the demand for a given product and who wants to purchase it. This is determined by how willing consumers are to spend a certain price on a particular good or service. As market demand increases, so does the price. When demand decreases, prices will go down as well. A simple horizontal summation of the quantity sought for a commodity by all buyers at each price yields market demand.

Price (Birr/kg)	individual weekly demand (kg/week)(Consumer-1)	individual weekly demand (kg/week)Consumer-2	individual weekly demand (kg/week)Consumer-3	Market Demand (kg/week)
8	0	0	0	0
5	3	5	1	9
3	5	7	2	14
0	7	9	4	20

The preceding demand schedule shows the different quantities of oranges demanded by different consumers at various price levels in the market. At Birr 5 per kg, consumer-1 demands 3 kg, consumer-2 demands 5 kg, and consumer-3 demands only 1 kg. Thus, the market demand at Birr 5 per kg is 9 kg. However, at Birr 3 per kg, consumer-1 demands 5 kg, consumer-2 demands 7 kg, and consumer-3 demands 2 kg. Therefore, the market demand at Birr 3 per kg is 14 kg. The individual and market demand curves for the data given in the above table are depicted in the figure below.

Figure 4.2 Individual and market demand curve for a commodity