The demand for a commodity is the total quantity demanded by an individual consumer,
hence, one can talk about the demand for milk, potatoes, bread , etc. People
at present talk about the renewed demand for housing. What
is the significance of this?
What is an economic good?
The following are the characteristics of an economic good:
- it must be scarce in relation to the demand for it .
- the product must command a price and supply must be scarce
in relation to the demand for it. For this reason --fresh
air, clean water and good health are not economic goods.
- the economic good must give satisfaction or benefit to the
person consuming it.
- for a product to be an economic good it must be transferable
from one person to another
..sand in a desert has no transferable value,
or exchange value.
Assumptions relating to economic behaviour
- acts rationally--- this means the consumer will buy the item
at the lowest possible price and maximise his/her utility
- has limited income---very few people have an income large
enough to satisfy all ones needs, or wants.
- wishes to maximise utility. a consumer gains maximum utility
when he/she satisfies the law of equi-marginal returns.
- the consumer is subject to the law of Diminishing Marginal
Utility,is the utility from the last unit of the good consumed.
A law of diminishing marginal utility = as more of a good
is consumed the utility from the last unit of the good consumed eventually begins
to decline after a certain point is reached.
The law is based on the following qualifications:
- does not apply to addictive goods.
- a certain quantity of the goods must be consumed.
- does not allow for changes in taste.
- income must remain constant.
The law of equi-marginal principle
This law states that a consumer will gain the maximum satisfaction if he/she
spends their income in such a manner that the ratio of marginal utility to price
is the same for all goods which he buys.
FORMULA: = MU1 = MU2= MU3
The shape of the normal demand curve is downwards from left
to right due to the law of equi-marginal principle
What are the factors which influence consumers demand?
Demand for A=f(Pa, Pog,Y, T, E,G,U,)
- The price of the good itself when the price of the good falls,
people usually buy more of the good
- The prices of complimentary and substitute goods:
If the price of a substitute good rises then demand for this good rises as
it has become relatively cheaper i.e. tea and coffee.
Complimentary goods and goods used in conjunction with each other
If the price of a complimentary good rises then demand for this good falls
e.g. an increase in the price of petrol will result in a drop in the demand
for large cars.
- The income of the consumer:
For most goods as income rises the demand for them increases and vice-versa
e.g. small quantities of goods are bought when a person become unemployed
- The consumers tastes:
When a commodity comes into fashion or into season, there is an increase in
the quantity demanded at each price Advertising attempts to influence taste
in favour of the good
- The expectations concerning future prices, availability of
If a consumer expects that future prices are likely to be greater then they
are at present, then there will be an increase in the demand for the good
at each price.
- Government regulations:
If the government initiates a programme to curtail consumption of a particular
good then it may affect the demand for this good e.g. a health education campaign
to curtail cigarette smoking.
- Unplanned factors:
If there was a sudden heatwave this may result in the increased demand for
The normal demand curve has a negative slope ,and slopes downwards
from left to right,illustrating the negative relationship between price and
A perverse demand curve: in this case as price rises demand
rise, and when price falls demand falls---an example here are giffen goods or
A movement along a demand curve is caused by a change in price
in price of the good in question.
A shift in a demand curve is usually caused by a change in any
of the factors which affect demand e.g. price of substitutes/compliments, income,
taste etc. an increase in income will shift the demand curve to the right.